By Bhavik Patel
Gold rate has shown relative strength against rising US dollar and Treasuries. The US Dollar continues to trade near its highest level of 2002 and it seems gold is becoming immune to Fed’s hawkish stance. Heightened geopolitical concerns have prompted some mild safe-haven demand and are keeping the speculative bears on the sidelines late this week. Volatility for gold prices was at its peak during the FOMC meet. The big takeaway from Powell’s press conference was the expectation of additional 125 basis points worth of increases this year, which could translate into another 75 bps hike in November and a 50 bps increase in December. This was unexpected as the market was anticipating rates to peak around 4-4.25% this year but Fed is anticipating 4.40% by 2022 and 4.6% by 2023.
The US Dollar zoomed to 111 hitting fresh 20 year high while all asset classes were left to bleed. Historically we have seen that there is a relief rally after US Fed hikes rates and currently also we are witnessing that. $1650 for now has held its support and despite USD and Treasury yields hitting fresh multi-decade high, gold is not falling as much. This shows that there are buyers emerging around the support area.
If we look at gold’s performance after one week of the Fed’s rate meeting, there was a negative return of -1.57% in January when the Fed made an intention of starting a rate hike cycle in March. In March, gold gave a positive return of 1.21%, followed by 0.42% in May meet, followed by 0.92% in Jun meet and last 1.32% in July meet. So in essence, since this year after the Fed has started rate hike, gold has closed positive after a week as the market had already anticipated the rate hike. This time too gold has not reacted negatively and continues to trade sideways after recent FOMC meet.
We anticipate a rally on the upside to continue in Gold. If gold manages to break $1700, then we can see levels till $1725-1730 however we are not expecting any steep upside rally owing to Dollar strength. Going forward, USD is expected to remain strong which will provide headwinds. As long as $1650 is not breached on the downside, it is safe to hold on to long positions. In MCX, 48800 seems to be a good support of Oct contract and one can go long with stoploss of 48800 and expected target of 50800-51000. Major headlines for gold are over so expect gold to consolidate and climb higher albeit in slow pace next week. Any unexpected bad news from Russia-Ukraine will also help gold. Gold may give a return of 0.5-1.00% next week and hold or take a fresh position with a stoploss of 48800.
(Bhavik Patel is a commodity and currency analyst at Tradebulls Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)